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AICPA Urges Congress to Quickly Fix Tax Cliff

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Congress must reach an agreement on expiring tax
provisions as soon as possible because small
businesses are being impeded from long-term tax and
cash flow planning and prevented from making informed
decisions. That is the message Jeffrey Porter, vice
chair of the AICPA Tax Executive Committee, delivered
to the House Subcommittee on Economic Growth, Tax and
Capital Access in a hearing on Thursday in Washington.

The hearing was titled, "Adding to
Uncertainty: Small Businesses' Perspectives on the Tax
Cliff," and the subcommittee, part of the U.S.
House of Representatives Committee on Small Business,
heard from witnesses representing Women Construction
Owners and Executives, USA, the North American Die
Casting Association, and the Tax Foundation, as well
as the AICPA.

One goal of the hearing was to
examine how the scheduled expiration of the lower tax
rates enacted in 2001 and 2003 is affecting small
businesses' decision-making. Another goal was to hear
small businesses' views on the Obama administration's
proposal to let the current top two tax rates expire
(and increase) for taxpayers with income over $200,000
a year ($250,000 for married taxpayers filing
jointly).

In written and oral testimony, Porter
addressed the impact of tax uncertainty in several
areas and made recommendations on behalf of the AICPA
for alleviating some of that uncertainty. He
emphasized the difficulties businesses are having in
planning for the future when income tax rates, capital
gains tax rates, and the tax rate for qualified
dividends, and the availability of various deductions,
credits, and exemptions are all uncertain.
"Multi-year planning and the ability to predict
(or at least estimate) business profits and taxes are
critical in operating a business," he noted. He
also pointed out that structuring business
transactions, such as the sale of a business, depends
on knowing future income tax rates.

Estate,
gift, and GST tax

Porter's written testimony also urged
Congress "to take prompt action to enact
permanent estate, gift, and GST [generation-skipping
transfer] tax provisions and thus provide needed
certainty to taxpayers planning their affairs."
He cited a retailer who is planning to gift $5 million
of his company's stock to take advantage of the
current unified estate and gift tax exemption amount,
even though the transfer does not fit into his overall
succession plan. Porter noted that in the current
climate, "some small business owners feel
pressure to accelerate or modify" their business
succession plans.

The AICPA has seven
recommendations for Congress to consider when enacting
permanent estate, gift, and GST provisions:

Make permanent technical modifications
to the GST tax rules that provide relief from
several GST tax traps that previously existed;

Maintain the current
gift and estate tax exemption amount and index it
for inflation;

Maintain a uniform gift, estate, and GST tax
exemption;

Maintain
the portability of the estate tax exemption
between spouses;

Reinstate the full state estate or death tax
credit;

Provide
broad-based liquidity relief, rather than targeted
relief provisions; and

Provide many estate tax brackets.

Tax extenders

Porter also addressed
the difficulties presented by the large number of
temporary tax provisions that have expired or are
scheduled to expire. He told the subcommittee that
these "in the last several years have repeatedly
created uncertainty and confusion. The
on-again-off-again nature of extenders, coupled with
retroactive tax law changes, make long-term planning
difficult, result in the filing of amended returns,
and significantly increase the overall
complexity."

In his written testimony, he
presented the AICPA's recommendation that "future
tax changes should be enacted with a presumption of
permanency, except in rare situations in which there
is an overriding and explicit policy reason for making
provisions temporary."

AMT

Porter
urged Congress to address the alternative minimum tax
(AMT) rules, noting that, "the AMT exemption has
become an annual problem" and that the most
recent AMT patch has expired. "As a result,"
he told the subcommittee, "estimated tax planning
for small businesses has to take into account the
lower AMT exemption amount. This means many small
businesses will essentially provide the government
with an interest-free loan or risk paying an
underpayment penalty if the AMT patch is not passed
retroactively. It is a no-win situation for these
taxpayers."

Porter's written testimony
reiterated the AICPA's support for repeal of the AMT,
and, in the alternative, strongly urged Congress to
permanently index the AMT for inflation.

Tax
administration

Finally, Porter strongly urged
Congress, "to not underestimate the effect that
the tax cliff has on tax administration itself."

He told the subcommittee, "If Congress
waits until late in the year—or even into next year—to
enact tax law changes, the IRS and commercial software
vendors must scramble to revise tax forms and update
software." And he reminded them that just two
years ago, the late passage of tax legislation delayed
the initial date when many taxpayers could file their
returns.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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